Working capital management


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Working capital management

  1. 1. By, Priyanka
  2. 2. Definition of working capital- Working capital is the difference between the inflow and outflow of funds. Working capital= current asset- current liability
  3. 3. Current asset Current liabilities  Cash in hand  bank balance  Prepaid expenses  Bills receivable  Short term investment  Sundry debtors  Stock of raw material  Marketable securities  Bills payable  Sundry creditors  Outstanding expenses  Dividends payable  Provision for taxation  Short term loans  Bank overdraft  Proposed dividend
  4. 4. Types of working capital  Net working capital  Gross working capital  Permanent working capital  Variable working capital  Balance sheet working capital
  5. 5. Net working capital  The net working capital is the difference between current asset and current liability  The concept of net working capital enables the firm to determine how much amount is left for operational requirements.
  6. 6. Gross working capital  It is the amount of funds invested in the various components of current assets.
  7. 7. Permanent working capital  It is the minimum amount of current asset which is needed to conduct a business even during the dullest season of the year.  The amount varies from year to year  It represent the current assets which are required on a continuing basis over the entire year.
  8. 8. Variable working capital  It is the additional assets which are required at different times during the operational year.  Ex – purchasing of inventory need of cash to tackle the unexpected situation.
  9. 9. Balance Sheet Working Capital  Balance sheet working capital is the one which is calculated from the items appearing in the balance sheet.
  10. 10. Cash Working Capital  This is calculated from the items appearing in the Profit and Loss account.  It shows the real flow of money
  11. 11. Negative working capital  This happens when current liabilities exceeds current asset.  This condition shows that the firm is in crisis.
  12. 12. Factors determining WC  Nature of industry  Demand of industry  Cash requirements  Nature of business  Manufacturing time  Volume of sales  Terms of purchase and sales  Inventory turnover  Receivable turnover  Production schedule
  13. 13. Cont …  Business cycle  Current asset  Valuations in sales  Production cycle  Credit control  Liquidity and profitability  Inflation  Seasonal fluctuations  Profit planning and control  Repayment ability
  14. 14. Cont …  Cash reserves  Operational efficiency  Change in technology  Firm’s policy  Size of the firm  Activities of the firm  Attitude to risk  Storage time and etc,.
  15. 15. Nature of business  Working capital requirement depends upon the nature of business carried by the firm. Normally, manufacturing industries and trading organizations need more working capital than in the service business organizations. A service sector does not require any amount of stock of goods. In service enterprises, there are less credit transactions. But in the manufacturing or trading firm, credit sales and advance related transactions are in large amount. So, they need more working capital.
  16. 16. Credit control  Credit period allowed to customers is also one of the major factors which influence the requirement of working capital. Longer credit period requires more investment in debtors and hence more working capital is needed.But, the firm which allows less credit period to customers needs less working capital.
  17. 17. Seasonal fluctuations  In certain business, raw material is not available throughout the year. Such business organizations have to buy raw material in bulk during the season to ensure an uninterrupted flow and process them during the entire year. Thus, a huge amount is blocked in the form of raw material inventories which gives rise to more working capital requirements.
  18. 18. Size of the firm/business  Working capital requirement of a firm is directly influenced by the size of its business operation. Big business organizations require more working capital than the small business organization. Therefore, the size of organization is one of the major determinants of working capital.
  19. 19. Storage time  Time needed for keeping the stock in store is called storage period. The amount of working capital is influenced by the storage period. If storage period is high, a firm should keep more quantity of goods in store and hence requires more working capital. Similarly, if the processing time is more, then more stock of goods must be held in store as work-in- progress.
  20. 20. Changes in price level  Change in price level also affects the working capital requirements. Generally, the rise in price will require the firm to maintain large amount of working capital as more funds will be required to maintain the sale level of current assets.
  21. 21. Dividend policy  The dividend policy of the firm is an important determinant of working capital. The need for working capital can be met with the retained earning. If a firm retains more profit and distributes lower amount of dividend, it needs less working capital.
  22. 22. Access to money market  If a firm has good access to capital market, it can raise loan from bank and financial institutions. It results in minimization of need of working capital.
  23. 23. Working capital cycle  When the working capital cycle of a firm is long, it will require larger amount of working capital. But, if working capital cycle is short, it will need less working capital.
  24. 24. Operating efficiency  The operating efficiency of a firm also affects the firm's need of working capital. The operating efficiency of the firm results in optimum utilization of assets. The optimum utilization of assets in turn results in more fund release for working capital.
  25. 25. Market conditions  When competition is keen, larger inventory of finished goods is required to promptly serve the customers who may not be inclined to wait because other manufacturers are ready to meet their needs. Further generous credit terms may have to be offered to attract customers in highly competitive market . Thus , working capital needs tend to be high because of greater investment in finished goods inventory and accounts receivable .
  26. 26.  If the market is strong and competition is weak , a firm can manage with smaller inventory of finished goods because customers can be served with delay . Further in such situation the firm can insist on cash payment and avoid lock up of funds in accounts receivables - it can even ask for advance payment , partial or total .
  27. 27. Conditions of supply  The inventory of raw material, spares and stores depends on the conditions of supply. If supply is prompt and adequate, the firm can manage with small inventories.
  28. 28. Risk factor  Risky business requires greater need of working capital than the less risky business.
  29. 29. Purchases and sale method  If a firm purchases the raw materiel on credit and sells the product on cash then less amount of working capital will be required.
  30. 30. Quickly Sale-able Product  If the product is quickly sale-able for cash then less amount of working capital is needed. On the other hand greater amount will be needed.
  31. 31. Size of labor  If a large number of workers are employed in any business then a large amount of working capital will be needed
  32. 32. Thank you